Being the blog of Charles Stross, author.

What are the long-term consequences ...?

As you may have noticed, in the second half of 2008 we had a minor whoopsie in the banking sector — what is laughingly known as a "liquidity crisis". Now here's the sound of another shoe dropping. The Observer reports:

Drugs money worth billions of dollars kept the financial system afloat at the height of the global crisis, the United Nations' drugs and crime tsar has told the Observer.

Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were "the only liquid investment capital" available to some banks on the brink of collapse last year. He said that a majority of the $352bn (Â£216bn) of drugs profits was absorbed into the economic system as a result.

Organised crime always has a problem with legitimising (or laundering) the proceeds of its operations. If you're a regular widget business and you have a billion dollars coming in, you have accountants and pay taxes (or rather, pay accountants to avoid taxes) and everything is above board. But if you have a criminal widget business — selling heroin by the gram, for example: one gram of heroin being a "widget" in this context — the police would like nothing better than to get their hands on your accounts so they can crawl back up your supply chain and arrest everybody. You end up taking lots of cash, and then face the fun conundrum of how to invest the money. Banknotes stuffed in a mattress aren't working for you, after all.

There are draconian anti-money-laundering controls in place throughout the banking system in the UK, the USA, and pretty much the entire developed world. Ever wondered why your bank wants to see a passport or government-issued photo ID before opening a new account? It's in case you're a runner for a criminal firm, trying to open another deposit box to shove the money inside. Once you're in the legal system you can do things with your money other than simply leave it in a bank's virtual vault; you can invest it elsewhere. Indeed, if you've got more than a couple of thousand bucks to spare, and the banking sector as a whole is going through a liquidity crisis, you want to invest it elsewhere.

What we've just seen, hidden in the euphemism here, is a confession that drug cartels and other organized criminals have gone on a $352Bn asset-buying spree — and the banks and regulators, world-wide, turned a blind eye to this because the alternative was to allow the banks to collapse. And the corollary is that these investments are now in the system, laundered, whitewashed, and legit. These narcodollars aren't neatly bundled up inside the mattress any more; they're in the system, doing their owners' bidding.

A third of a trillion dollars is a lot of money; it's enough to fund the US military invading another country halfway around the world, or a manned Mars exploration program. Obviously, there's no single Mr Big here, no Blofeld investing SPECTREs ill-gotten billions in an ambitious bid to go legit.

But one wonders whether the "organised criminals" have been investing in anything innovative. (Politicians, if they're smart.) And what the long-term consequences are going to be ...

79 Comments

My dad had money in an Iranian bank back in 1980. When the Shah fell, the US government confiscated all the Iranian assets in the US and compensated all Americans with Iranian assets.
My father had neglected to report the money to the IRS and so could not claim the money.
What do you think is going to happen to the narcotrafficante money when America defaults or hyperinflates or whatever?
Not to mention the Eurotrash, Nomenklatura, Red Princes, License Rajas, WaBenzi, Oil Sheikhs, Triads, etc.

Pushers, apart from maybe the initial taster (never met one of those) don't give credit. Cash on the barrelhead all the way up the line with severe physical repurcussions otherwise. As to the mainpoint, my only suprise is that they are admitting it at all

Some fraction of $340Bn laundered through the banks. That's a lot of shares in a lot of companies. If you could move it into private venture funds (and they'll take almost anything when raising a new fund) you could leverage it to end up owning a really interesting chunk of the Old Economy...

Alternatively, the American spooks set up a VC fund to develop relevant technology. So a narco VC fund - where would that go? Autonomous vehicles and weapons systems? Look for a few of the smaller UAV companies being bought up - a Predator or Raptor would make a great way to do cross-border smuggling.

I imagine that the long-run effects will be similar to what has happened in the past-- the various thieves, murderers, and drug lords will pass their assets on to their children, and their children will go on to become the next generation of wealthy spendthrifts, politicians, and literary critics.

Although you can launder the money, where are you going to find a RoI anything like drugs? Straight investing in straight business would be a mugs game. Better to find a trustworthy business, buy it, and pervert it to your ends in the drugs trade.

Could suggest a religion of some kind as a good investment opportunity for these purposes. Better still is private security or running prisons.

Well, the usual ones. Further corruption of politics through single actors trying to become a bit richer than the other guys, with the eventual result (for arbitrary values of eventual) that a more civilized country will leave them in the dust.

The question really is if and how much the future of the US matters any more. The US has hit the highest point of its power after the Cold War and has completely neglected the economic basis of its success since then. Mostly through out-sourcing of its industry to Europe and China, replacing it with a 'finance industry' that ended up taking advantage of those countries while at the same time disincentivizing real industry at home. The result is indistinguishable from classic colonialism, in anything but name and the way colonies are organized.

It is much more questionable whether the US will retain anything like the financial superiority it had in the last decades than ever before.

If it can, the consequences will be bad and global industry could become much more dependent on the whims of drug cartels and their ilk. Because those investments aren't just a money laundry operation, they grant direct influence over those companies and banks.

If it cannot, the consequences will be self-limiting.

Any mixture of those is also possible, perhaps involving the Chinese deliberately crashing the US economy for whatever reasons (like US economic policies becoming too onerous to do business reliably - those Chinese are much better capitalists than the yankees).

@Charlie: Interesting addendum. According to Trevor Paglen's Blank Spots on the Map, the black part of the US government employs more people, and may have a larger budget, than the open part of the US government. For instance, the "black space program" out of Vandenberg reportedly has a much larger budget than NASA.

Some of this is simple confidential work, but a lot of it is because they want to circumvent various inconvenient US laws, including some large chunk of the war on drugs. They also get to avoid those annoying accountability requirements.

Interesting parallel. Both the drug industry and the black MIC have grown up almost in tandem, and certainly through interaction.

Firstly you are conflating the estimated total $1/3 tn of total drug profits with some small fraction of that that entered the banking system. Of teh drug money in the banking system, only a small fraction probably went into the official banking system. Almost certainly what Costa meant was that he had seen evidence that at least one bank took a transfer from a bank that was known to be a bit shady or unregulated. A number of banks in the Cayman's come under this definition, for example. This is all a very far cry from saying that $1/3 tn of drug money was laundered under cover of the financial meltdown. It wouldn't surprise me that a blind eye was given to any such transactions when the fear was a total meltdown of the global financial system.

The biggest irony would be that the drug barons were buying political influence to arrest any moves at drug legalization.

As for drug money entering the legal system, money laundering of profits from illegal activities has been around for ever. They are a myriad of ways to launder money and to think that "suddenly" a huge slug of it has entered the financial system is naive. It might make for sensational copy in a British newspaper, but that is all.

Certainly, there are strong incentives to legitimize narko dollars/euros/rubels - beyond the obvious problem that having a billion dollars you cant spend without being arrested isnt that useful, there is also the risk that the entire house of cards could come down on top of them, and the black economy could have its very own black tuesday -

Risks:

1: Legalization. This isnt that likely in the short term, but Carlos "No-nose" the drug wholesaler would not fare well competing against pfizer.

2: Innovation in kitchen chemistry. The supply chain of a Meth lab does not lead back to Bolivia or Afganistan, but to far more local and legit sources of chemical feedstocks - the combination of information spread and advances in biochemical understanding could very easily lead to a world in which anyone who wants to get high is far more likely to have a jar of genetwisted yeast turning sugarwater into cocaine beneath the bed, or to scrub down their kitchen sink very carefully and then follow a recipie they got off the net to make an amphetamine-analogue than to go looking for a dealer.. and there is no stream of money from either of those sources. Rep-rap philosophy as applied to chemistry.

3: "A cure". For addiction. This sort of technology probably boarders on mindcontrol, but that doesnt mean it would not get used if it existed.

The data on money laundering, as well as underground/informal economies (the distinction is not always clear) is pretty bogus. Nobody knows because by definition this stuff is under the radar, various agencies with an interest in hyping this come up with numbers and these get thrown around as authorative. If you then add to the problem of people conflating tax avoidance and hot money with criminal money, and the result is a data set which is extremely noisy.

And Felix is right, Costa is a particularly untrustworthy source. Publicity hound, basically.

Thomas #16: For starters, there is an obscure hallucinogen with the unique side effect of wiping out addictions. It's been around for years, but has been fairly effectively suppressed, for all the obvious reasons.

As for long-term consequences... this is the sound of a nation failing. On the flip side, as the U.S. loses power, the rest of the world may start recovering from the abuses we've inflicted on them with our Puritanism and our greed.

There are of course many precedents for a cross-over between the world of organised crime and the state.

In the last years of the apartheid regime in South Africa, for example, many members of the South African state's security apparatus were deployed in politically-oriented criminal activities, as part of the regime's wider counter-insurgency strategy. These activities included (for example) running brothels as fronts for meeting informants and political contacts. Apparently at least one of these brothels is still running today - and being run by its original handlers, but this time as a purely criminal, for-profit operation. . .

@heteromeles: I really doubt the black bits of the US government actually have a bigger budget than the white bits, as they would have to be ludicrously well-funded (to the tune of trillions of dollars, money which is really just not in evidence). Now, them having a much larger budget than certain corresponding bits of the white government I can buy (your story of Vandenburg having more funds than NASA makes perfect sense to me on several levels).

A point that interests me is that there's allegedly $BIGNUM in untaxed US citizens' income sitting in offshore bank accounts that can't be repatriated until there's a tax amnesty of some kind.

If the banks were badly enough in need of liquidity to ignore money laundering rules, that'd be a far more attractive target for inward investment than narcodollars. (For one thing, there are fewer investigative agencies with an interest in it ...)

I'm intrigued by the idea that a banking liquidity crisis could result in big chunks of the 'black' economy surfacing, despite the threat of governmental sanction.

I have been recommending the following to people since I first saw it in 2008. The title of the paper is "From the Middle Ages to a New Dark Age". It is brilliant, well written and terrifying. It is particularly frightening because it was written for the US Army Strategic Studies Institute. Briefly, the author discusses the decline of the US in particular but the nation-state in general. And, the potential catastrophe for civilization. One of the major points he discusses is the globalization of crime. It is quite relevant to the current discussion. Truly a potential New Dark Age.

If you are saying that banks with off shore assets of tax evaders use those funds to ensure liquidity, that is unlikely as those assets are not liquid. If you are saying that people with those assets might want to invest in banks on very favorable terms, again I'm not clear what the benefits are, compared to existing investments. If an investor had a lot of cash to invest, it would probably be better to set up a bank under the investor's control, to avoid any future UBS type problems.

Now what might be interesting is an amnesty to bring those funds back into the legitimate economy. However, the world is not short of liquidity, and neither are governments with printing presses. So what the benefits are to sovereign states to suggest changing the existing rules escapes me. If anything, the UBS experience suggests that tax evasion will be even more carefully hidden in future.

I think the financial crisis will exacerbate the black economy via this logic chain.

1. Governments are stimulating their economies by printing high powered money with teh belief that this will pay for itself over the long run.

2. Many commentators talk as if indebted countries like the US will have a currency crisis with ethe $US falling in value in global currency terms.

3. many commentators do not believe that the long run benefits will be positive or even a wash, but will inevitably require higher taxes (and the wealthy are the only ones who can pay them) to pay for the higher debt servicing. (The US wars in Iraq and lowered tax rates were already pointing in that direction).

Therefore:
4: The best protection of assets is to avoid taxes and keep them out of the view of the sovereign authorities. This implies more off shoring of assets rather than less. If necessary, renounce citizenship, as Templeton did when he dropped his US citizenship. Britain fortunately has less onerous laws than teh US in this regard.

US banks and credit unions are required to report deposits that are equal to or greater than $10K. Last year, a friend of mine and many others had a big stroke and since he was a freelance copy editor, didn't have any health insurance. I collected about $15K total and when I moved it from PayPal to my credit union account, I called first and told them what was going to happen. It probably helped that one of their officers goes to my bookgroup, because I didn't have any problems. (Then we moved it to a trust in NYC, managed by other friends, so it would be close to him.)

@20: From what I read, I 'm not sure whether he was lumping in confidential items with the traditional black military. Remember, this is also post 9/11.

Charlie made an interesting point, but I think it's an extreme side of a bigger problem, which is we don't know much of what any of the big players are doing with money. We don't know what the militaries are spending (heck, we don't even know how much the US Iraq War cost, because they've been larding the accounts and fiddling with things so much), we don't know how much things like blockbuster movies cost or make, we don't know what the heck the major financial sectors do (except that a lot of the money flows ultimately to Goldman Sachs and thence to its high-level employees), and we don't know much about the illegal trades in drugs, human trafficking, smuggling, and such, except that, in the case of drugs, they are the largest crops in some parts of the world.

What I take from this, is when the Great Crash hits, we'll be totally blind-sided by it (worse than happened last year), and the survivors will be making up black swan-style stories to explain it for years afterwards. Trillions of potentially real dollars sloshing around looking to become legitimately real is one hell of an unsecured weight in the holds of the various ships of states.

Thomas @16: Carlos 'No-nose' may be a poor chemist, but there are some pretty good ones operating on the edge of the law, according to
Forensic Science International. Fromhttp://www.mindhacks.com/blog/2009/12/spice_flow_the_new_.html :
"Forensic Science International recently published an eye-opening study on a new generation of synthetic cannabinoids that have become popular as 'legal highs', provided by a highly organised neuroscience-savvy industry that is ready and waiting with new compounds before the law changes."

The report you linked to, if anything, is a display of some strange misperceptions that are rather common in the US, but also elsewhere. Namely, that the only possible kind of order of the world is one where the US provides this order.

If nation states increasingly fail to functions, it is because the USA is a nation state and has the domination of all other nation states (read: world domination) in terms of politics, economics and military capability as its stated goal.

Believe it or not, but the other 6.5 billion people don't want to be dominated by a capricious group of self-aggrandizing yankees. The natural role of the US is one in which it has roughly one tenth of its current economic and military power, relative to the rest of the world.

Being a state-actor itself, the US can only effectively impact other state-actors. But the only way to stay ahead of the game and dominate the rest of the world, is to keep the other states weak enough.

So if a group of people desires true sovereignty, statehood certainly isn't the way to go. Thus, through a simple process of selection, states start to disintegrate when an all-dominating power like the US emerges.

If the US was truly concerned about the stability of states, the very first thing to do would be to abandon world domination and help strengthen the other states, instead of keeping them weak enough to dominate them.

I am not at all sure that the total in the story is anything like the money available in the drug trade. The estimated "street value" goes through a lot of hands, all taking a large profit off the top.

Consider the stories of boats being intercepted, and the value of the drugs being given as "street value". There's a lot of money there--they're building their own submarines--but it's nowhere near retail.

But consider where the money that built Las Vegas came from, and think about why the USA is chasing after Internet gambling operations. There was a lot of money shifted from illegal to legal, and there's a lot of money being spent by the now-legal casino businesses to keep out the competition.

Perhaps that's one reason why the DEA in America is fighting medical marijuana. They're scared of what might get into the medical industry. But the medical insurance industry in the USA seems to be about as much about dealing with medical problems as the classic Protection Racket is about protecting customers.

What were the long-term consequences last time this happened? During the 1980s everyone in Miami was carry garbage bags of cocaine cash to the bank (well, according to Discovery channel documentaries and various movies).

I think it's important to remember that the money doesn't belong to the "criminal enterprise", it belongs to the handful of people who control and manage assets in such organizations. Consequently the investments will reflect those individuals personalities and passions as much as strategic business moves. The question is "What would Pablo Escobar do" with legitimate investments, not "What would the Medellin cartel do?"

With Escobar in mind, it would be cleverer to set up a security company a la Blackwater, and buy out your law enforcement threats via corporate headhunting instead of assassination. Collapse a troublesome task force with signing-bonuses for a 2-year contact.

@32: Blue09: a buy-out might work, if you could solve some endemic drug addiction and mental health (read: psychosis issues) that seem to be fairly common in the drug industry, and then you have to figure out how to make such a security firm more profitable than running a successful drug cartel.

there's not much, if any, difference between organised crime leaders and corporate leaders. in many cases, they're the same people...and their kids (the next generation of our evil overlords) all go to the same schools, anyway.

No, seriously. I'd buy the prisons, or make my own. Many American prisons, at least, have privatized or are run by private security. Why spend time creating a social network of gophers and rats on the inside when you can manage the inside and use the space as a prototyping lab for new customers and new employees?

I think investing in a politician is only one part of the game. Investing in a lobby group is almost more efficient, because lobbies can switch from scattershot to sniper attack in a short amount of time. They know who to lean on and how, and can amass far more votes through message promiscuity. Perhaps that's what the "investing in politicians" remark meant in the first place, though.

The former is a short-term solution and the latter a long-term agenda, but as for expanding the customer base as whole and hiding in plain sight...I'm sure they can find a car company/record label/newspaper/incompetent 3G network provider to buy up, eventually.

Dave @30:
In bad neighborhoods in Columbia/Venezuela cocaine has a street value between 1-2$/g. In Galicia, where much of the European cocaine enters, whole sale prices are supposedly 25k EUR/1 kg (which might be enough to produce 5kg of street-level cocaine). Essentially you have 35$/g of clean cocaine (maybe 7$/g of the stuff you encounter on some party) for international traffickers, the rest is distribution. Some of this distribution may be well organized, but most of it by far is done by Turkish, Arab or Albanian families, motor-cycle clubbers and the like (the "Gangstas" taking the risk). These people are not sophisticated, even though their attraction on schoolkids is a big problem.

Charlie @ 21:
First you have to understand, that central banks of developed countries have unlimited funds and they were using them. They had the power to keep their client banks afloat and they did so (with one symbolic exception for political reasons). There was never any need to repatriate funds.

The banks that were in mortal danger, were the ones that couldn't run to daddy. That would be banks in Antigua, Virgin Islands, etc.
You also have to understand, that probably there was the political will to really hurt this banks, since they essentially live from tax evasion. Paying taxes gets a lot more attractive, if you view it as the price for deposit insurance.

So we have a limited number of banks that were desperate enough for funds to probably accept drug money. That doesn't mean this money "entered the system" in the sense that you could bring this money easily to the US/Europe now. All that happens is 1) some Columbians get international money market interest rates now and 2) the US/Europe have another valuable excuse to hit offshore banking and they will use it.

This is probably based on facts, but at the same time it's a trumped up piece of propaganda in the Great Tax War that even dwarves drug money.

If I were a drug kingpin with some newly acquired legislators in my pocket, I'd give them two instructions.

1. Do not, under any circumstances, legalize it or reduce penalties or enforcement efforts.

2. Give me a loophole in the money laundering laws so I can give you more campaign contributions.

If the loophole didn't materialize, I'd work on keeping the economy destabilized. If it did materialize, I'd be looking for new markets, and I'd look to criminalizing tobacco. Maybe alcohol, too.

If, instead of a drug kingpin, I were a struggling sci-fi author who couldn't afford good pot, I'd write a steampunk story about how US Prohibition was caused by the scenario just outlined. Start with the crash of 1870 or thereabouts. (-:

Charlie@11: I'm sure we'll *all* find Rule 34 interesting. If it weren't for your books, this would be a much quieter 'blog.

>Compare the current value of $1M invested in Microsoft or Apple in 1988 with $1M in drugs in the same year, for example

If I'd had $1M to invest in 1988, wanted to be sure of a return 10-20 years later, and had a choice of either two unknown companies run by geeky kids or a bunch of criminals I'd have gone for the crims.

The MS/Apple boom is a 'black swan': it couldn't be predicted and I'm sure there are a ton of other similar companies that went bust.

Robin @ 40: In any newly developing market that combines shiny new technology with relatively low entry costs, you can expect lots of enthusiastic entrants. Most will be some combination of undercapitalized, unlucky, badly managed, and otherwise incompetent to survive. A very few of these early entrants may not merely survive, but prosper mightily -- but selecting individual long-term winners at this stage is not easy.

A century ago, there were lots of promising new automobile manufacturers available for investment. Predicting that some of them would still be around in 100 years was plausible -- specifying that, say, Ford and Daimler Benz would be among the survivors would have required a rather more precisely focused crystal ball.

Stross
If you put money into a bank anywhere in the world, part of the bank's assets are in TBills or instruments that are equivalent to TBills. It doesn't have to be that way, it could be gold, tungsten ingots (my choice), or whatever. In the real world, a lot of it is TBills.
If the US defaults on the dollar, the Tbills and equivalents are now worthless.
The bank will not have enough other assets to pay off it's depositors.
The governments will take over the bank and pay off the depositors that it wants to pay off.
In Democratic countries, that will be voters. In Nondemocratic countries, that will be the governments. Democratic countries have most of the money in real form as buildings, companies, etc. China is the closest exception to this, and in China, the central government really, really, really, doesn't like low level corruption. There just isn't anything they can do about it. Till the US defaults on the dollar.

@42 The US isn't going to default on the debt. Even if things (as they might) get very bad for the US, that isn't going to happen. The worst scenario is a collapse in the dollar, which might happen (it happened a couple of generations ago after all), but would hardly be the end of the world that you're suggesting (crisis yes, but the US would survive, albeit weakened internationally).

And why do people get so obsessed with gold. The US was on the gold standard in the C19th, and it was a time of constant crisis, deflation and economic instability. And while the US national debt is not great, its not nearly as bad as people are making it out to be. Its been higher in the past, while US taxation levels are historically quite low.

Traditionally, companies that sell an addictive product (tobacco, booze, oil, telephony) are reliable income stocks - they are countercyclical, have good cash flow, and throw off a nice dividend. As a result, owners of them have often been investors in innovative businesses - they can afford to be less risk-averse. (As well as extreme-right politics, the Coors family were heavy investors in semiconductor technology.)

But if you work under illegal circumstances, things are very different. You don't have certainty of property rights, and you may need to flee or pay bribes at any moment. So you need to both hide your wealth, and stay liquid. Therefore, I would theorise that big crime has a much steeper liquidity preference schedule than comparable legal businesses - i.e., the return it wants before it will tie up cash in an investment is much higher.

This would imply that Big Coke's investment strategy would be ultra-conservative. What's the safest and most liquid asset you can have? It has the best credit rating of all, it's immediately saleable, and a bank can treat it as a reserve asset or discount it for cash with the central bank.

Dubai has long been friendly to organized crime (mob bosses of India often live there and many other organized criminals own property there). You can buy property for cash in Dubai with no questions asked.

I wonder if Dubai's recent financial problems have to do with organized crime finding a better more liquid way of laundering their money.

Long term consequences? I thought that you of all people would know better Mr. Stross. In the long term, the Drug cartels are dead.

Bio-tech will be a disruptive technology in this area, soon allowing anyone to produce any biologically generated substance in a bucket in their basement using bio-engineered bacteria. A company in Texas is already doing this for Vanilla, because the natural supply in Madagascar was becoming too hard to import (sorry, my google-foo has failed me here). Given the number of amateur bio-hackers, it is only time before someone figures out how to synthesize most drugs in their basement.

In the really long term, Ian Bank's book The Player of Games has people with brain implants that can generate any brain altering substance at will.

Back in 2000 when the dot com I was working for had just got its $4M first round (lunacy in and of itself) I remember being at a meeting in Dallas with the joint CTOs (yeah, q.v.) and all agreeing that we'd probably do better if they drove south with the cash and "converted" it into something other than the software/web site we were building - because it was the only way we were going to make a decent return before the crash.

Sounds unlikely to me. Even if the strangely-exact and unsourced drug $$$ number is right, it's pretty small change, really. The world's yearly gross economic product is estimated at $40B by World Bank. That's over 100x as much. Nothing like 99% of the economy was frozen.

Now, it might've been a pretty big helper in places like Colombia, where it's a big part of the economy.

I'm not so bothered about the amounts of illegal money floating around. Drugs, after all, are yet another product sometimes made by evil companies like Microsoft. No, its the numbers of evil execs that are the problem to me, and I'm not convinced drugs change that.

Have the cartels have made such bad and economically counterproductive decisions as, say, the newspaper and recording industry execs'? Both are probable comparably bad lobbying influences.

A big %age of the early American GDP was smuggling, against both UK and Spanish rules. American food kept countless Spanish imperial Caribbean colonists from starving.

Hmm.. well, one perspective is that this is nothing new - in those cases where scoundrels and thieves manage to die free, their ill gotten gains turn into into the inheritance of perfectly respectable pillars of society a generation or two down the line - If the laws against money laundering ever get so effective that this process stops, that would be something wholly new. -

However, there is also such a thing as human capital, even in criminal enterprises, and it just occured to me that "jonny the thug" could easily become exceedingly obsolete - The current income streams of organised crime are drugs, prostitution, gambling, and human trafficking. The drug trade could keel over dead in the wake of progress exceedingly rapidly, sufficiently good VR would kill prostitution stone dead, or alternatively, sufficiently good legal regulation of the trade could eliminate it as an income source for criminals, and gambling rackets are mostly a thing of the net now..

Find a way to adress trafficking as well.. (Global income convergence finally materializes? Unrestricted legal immigration?) and there is no work left for Jonny at all. There would still be crime, but I do not think Jonny would do well at retraining as a goldspammer.

Along a similar vein - a recent TED talk. A large part of the US economy has been propped up by the financial dealings of various terrorist networks. At least until 2001, after which the Euro has become everyone's favorite. So much for the war on terror:

@43 - People keep saying the US isn't going to default on T-bills. The fervour with which people say it always make me think it's an assertion of faith, rather than a fact. Do we have any evidence that the US wouldn't? Might not a military theocracy with cashflow issues decide to pull up the gates, stop paying out overseas, and put the 101st Airborne to work?

@54 It's a prayer! if/when the US defaults on those it'll make the current 'liquidity crisis' look like a tea party, We, the taxpayers. have pasted over the holes with upwards of two trillion in promissory notes - The US T bills equate to more than eleven trillion in accumulated debt. Not that the UK is much better off National Debt is approaching two trillion sterling and a budget deficit barely better than Greece - look at what that's doing to Greek loan stocks right now.

I know why Issac Newton did it, but I sometimes hanker for the days when coin was actually had a physical worth proportionate to it's face value. At least it kept politicians and bureaucracies (fairly) honest.

Oh and the 101st Airborne may be as good as you think it is but there's no way the military could do to China what it did to Panama or Haiti without resorting to nuclear weapons and that's self defeating if your manufacturing industry (and workers) is in the target area.

Also, what actual help is the military if you're going to default on your own debts? Egypt in 1882 etc were the other way around.

Further, there's no evidence that the US is in any danger of such. Evidence of this would include but not be limited to the interest rate on treasuries going up, not just a little, but drastically, and regular and substantial failures to get auctions away. None of these have occurred.

(Similarly, the Greeks actually aren't having any trouble at all selling government bonds. The regular auctions are fully subscribed at reasonable rates. As the details of them are on the Finance Ministry Web site, this suggests that the current panic is motivated by a naive faith in the informational content and moral integrity of credit ratings and by a very un-naive concern for talking down one's own short position.)

In the long term, the Drug cartels are dead. Bio-tech will be a disruptive technology in this area, soon allowing anyone to produce any biologically generated substance in a bucket in their basement using bio-engineered bacteria.

Of course. I personally plan to bio-engineer a micro-organism that will produce alcohol as a metabolic byproduct. Once I've perfected it, every brewer and distiller in the world will be out of business.

People keep saying the US isn't going to default on T-bills. The fervour with which people say it always make me think it's an assertion of faith, rather than a fact. Do we have any evidence that the US wouldn't? Might not a military theocracy with cashflow issues decide to pull up the gates, stop paying out overseas, and put the 101st Airborne to work?

I'm not even sure what this means. Put them to work how? Doing what? Does this person even understand what a T-bill is?

(Why do these folks not realise that long before the hypothetical militant theocracy has run into cash flow issues, it's going to have run out of money with which to pay the professional soldiers and cops?)

Even if the guys carrying the guns are loyal fanatics willing to work for a handful of rice a day, the folks who build and repair the weapons systems in question have families to feed ... and supply chains.

Nations that issue their own debt do not generally need to default - they can just debase the currency via the printing presses. It is generally nations that have external debt which is denominated in another currency that are likely default for financial/political reasons.

However, massive defaults can destabilize the lending banks too, so contagion can impact even lending nations.

As far as charlie's question (@21) is concerned, it is possible for unfavored smaller banks to accept illicit funds from the 'black economy' when under duress. However, my guess is that this money is already well laundered before it gets to the banks, so the question is moot - it is already happening. The fact that a lot of banks have failed in the past year in the US suggests that there cannot be a lot of scope for transactions of this kind otherwise those banks might have tried to avail themselves of this funding.

Jon @ 50
Rhode Island had a lot of residents who did pretty good business in smuggling. (To the point where it was also known as "Rogues' Island". And pointedly not counted as part of 'New England' by a lot of its neighbors.)

62:Why do these folks not realise that long before the hypothetical militant theocracy has run into cash flow issues, it's going to have run out of money with which to pay the professional soldiers and cops?

Not just that, but I'm not even sure what the plan is here. I just can't see what chain of events follows "US defaults on its sovereign debt" that includes the 101st Airborne. Are they supposed to fly into Shanghai and Dubai and force sovereign wealth funds to keep buying junk-rated US debt at gunpoint? Re-role as the 101st Fixed-Income Sales Division (Air Assault)? If the US defaults on its debt, there's nothing anyone else can do to force it to keep paying. For heaven's sake, Ecuador defaulted last year and it's not like anyone sent in the bailiffs.

Charlie @21
One factor to keep in mind is that penalties in the US and Europe for circumventing anti-money-laundering legislation apply both to the company and the individual - c.f. the Patriot Act. This has the effect of focussing the minds of banking and investment staff quite wonderfully. As Alex says @64, if the money is hitting banks in FATF-member countries, it's already been laundered shiny-white.

Repatriation of funds currently sitting in Caribbean/European tax havens is an interesting idea, and things are looking wobbly for the pre-exisiting business models of these off-shore bolt-holes. However, offering a tax amnesty is only going to tempt those who wish to repatriate their profits - and unless you're spending them, they will be invested in income-generating onshore assets that will be taxed. Not hard to see the lack of motivation implicit in that situation. It would serve the US (the Western world, in fact) better to continue the serious pressure on these havens to open up their records for review by revenue authorities.

Of course, you might find that the owners of that money looking for new 'grey' areas of investment, in countries where there are no records at all. And those money volumes really are in the James-Bond-Evil-Supervillain funding ballpark :-)

As for what the cash is doing - well, remember that the third of a billion is spread out over a number of smaller cartels. Even then, short of buying up a couple of old diesel-electric subs for smuggling work, what could the cartels want that they haven't already got?

All they have to do is keep Mexico corrupt and keep throwing disposable smugglers at the US border. Some will keep getting through, you'll keep getting richer. Not rocket surgery.

In their position, I'd be looking at merging with other factions - much of the opposition to the trade is because of the gang wars, and associated fatalities; if a number of major players were to start cooperating, law enforcement might give them some breathing space, and they could operate far more efficiently.

Of course, this isn't going to happen. Criminals with two brain cells to rub together are in short supply.

Interesting. It chimes with various rumours surrounding the non-collapse of various Icelandic banks earlier this year. Apparently considerable sums of Russian mafia money were exposed and the ex-communist gangsteravitch's made a lot of offers people couldn't refuse.
JsD @69 just to note, running diesel-electric submarines of any significant size is a very, very complex undertaking. You need large numbers of well trained and experienced people, along with large scale port and support infrastructure to keep the things operational. Not to mention the difficulties of acquisition - oddly enough even the most hard pressed former communist bloc country tends not to flog old Kilo class boats to just anyone, regardless of how much cash is on the table. All told, the effort involved really wouldn't be worth it just to move some tens of tons of coke once in a while. Far better to break the shipments up into numerous smaller consignments that'll fit in a fast speedboat, all the better for evading the narcs.
All that said, my inner Blofeld still hankers after an SSK all of my own. (strokes white cat)

Greg @67: you might want to note that merely mentioning the Cult of Hubbard is enough to cause the Blog Police bots to quarantine the comment in question and surround it by SCENE OF CRIME - DO NOT CROSS tape. Something to do with the mere whiff of litigation, and the moderation policy. I'm letting it through this time ... but please? Utter not that Name (at least, not carelessly)!

Were have you been? Criminal Orgs like Yakuza have been 'legit' for decades in Japan. The consequences have already been landing US shores for years. Their crime money is laundered in Japan then have been used to buy assets (like half of L.A.'s top tier real estate).

Meanwhile the construction industries worldwide, including America, have been the vehicle of choice for laundering crime money for big and small time operators.

There is some kind of short circuit in discussions of the US defaulting on it's debts. People seem to think you are saying the US is going to voluntarily default, as if not defaulting was an option.
The US government is not going to voluntarily default. They will print Tbills till no one will take them anymore.

heteromeles has it spot on, as does napoleani in her TED talk. as many will remember, Alfred McCoy's classic book on the politics of heroin (http://u.nu/9tv94) demonstrated the historical involvement of the CIA in the drug trade. it hardly is worth mentioning the obviousness of the situation, when people like Bush Sr. had to stuff their own conduits (like Noreiga) into dungeons. when you broach the subject of Pakistan (Zia and the ISI), or Iran Contra, Iraq, Columbia, Turkey, etc and see how tightly interwoven the octopus truly is, it is no surprise to me that some phone calls were made (whether from the offices of Carlyle Group, or Langley, or Goldman Sachs hardly matters) requesting some chips to be paid back into the so-called "legitimate" banking system. and if you believe that last part, i've got a bridge to nowhere and some invisibility-cloaked jet fighters to sell you!

ajay @60 (61?) Of course. I personally plan to bio-engineer a micro-organism that will produce alcohol as a metabolic byproduct. Once I've perfected it, every brewer and distiller in the world will be out of business.

ajay, I understand the point you are trying to make, that home brewing hasn't put the distillers out of business, but that isn't a good comparison. Putting aside the fact that the micro-brewery in the basements of a lot of pubs these day are putting a big dent into the profits of the big distillers, Alcohol is a legal commodity in most of the world and freely available. Most people don't brew their own because it is a hassle.

Most illegal drugs these days are grown in remote parts of the world, requiring extensive infrastructure to grow, process and export (smuggle) to their destination markets. A lot of the cost involves keeping the authorities away from the operations (bribes and corruptions in most cases but in some cases it has gone as far as taking over the government[narco-states], or a rouge government has gone into the drug trade itself). This is a product that is by definition not freely available, and because of the expense, there is little compilation in the market for these products (near monopoly). The group running this operation is what we call a drug-cartel. Competition in this market is restricted by both the expense of entering it, and the fact that the competitors are willing to use extra-legal methods to eliminate competitors.

The two exceptions to this model are mj grow-ops and meth labs, which just proves my point. These two drugs are widely considered the cheapest and most available drugs in most western markets because they are not controlled by a big cartel, but instead produced locally (no dealing with border controls) and massively decentralized. These operations are easy and cheep to set up, maintain and run. The criminal groups running these operations are magnitudes smaller then the big cartels and can be compared in name only. In short, there is competition in the market for these products.

Now imagine what will happen when bio-hackers get involved. Genetic codes will be traded on the Internet and although a lay-man will probably not be able to splice the genes into a suitable host, the skill-set and tools to do this are commonly available now. Set-ups to produce almost any substance could range from buckets used to grow bacteria (although a micro-brewery is probably a better model) housed in someones basement to common plants grown openly in someones garden (Tomatoes with high levels of THC [same family of plant]). the compilation in the market will crash prices and make interdiction at the border irrelevant and control nearly impossible. The price crash will make it hard for the cartels to fund their expensive and inefficient infrastructure (remote operations, bribes and such to keep authorities way, and of course the smuggling), hence they will be put out of business.

As for the war on drugs, this technology isn't so much the last nail in the coffin as the stake through the heart. The sad part is that this change (all drugs widely avaliable) will happen before society is prepared for it. If the western governments had switched to a sane drug policy years ago, and experimented using softer, less hazardous drugs, we might be able to handle the coming deluge.

You raise an interesting point, because gene engineered plants to produce recreational drugs might be legal under current laws. If it was made illegal, then the authorities would need very cheap testing devices to monitor this. Classic hiding in plain sight. It will be interesting to read when the first experiments in this area are done - probably any time from now and 5 years out?

This is a product that is by definition not freely available, and because of the expense, there is little compilation in the market for these products (near monopoly). The group running this operation is what we call a drug-cartel. Competition in this market is restricted by both the expense of entering it, and the fact that the competitors are willing to use extra-legal methods to eliminate competitors.

I take your point, but I don't think the above is true. Drug cartels nowadays are not really cartels in the price-fixing sense. They're cartels in the sense that they are groups of co-operating producers and transporters, but they don't have enough market share to fix prices. The fact that there are lots of drug cartels rather than just one should make this clear...

Furthermore, I think you may be underestimating how difficult it is to go from "hooray, I have a bacterium with a recombo plasmid that contains the gene coding for my target protein" to "hooray, I have a bottle containing 10 g of my purified target protein in the form of a white powder".

Charlie @ 71 - noted...
Though the loons referred to by John Varley as the "Elrons" are not quite a powerful as they once were ...
I think several countries are moving to list them as suspect / mind control crimianl organisation, and they have LOST several cases recently,m as their horrible profile becomes clearer in the public consciousness.

My first post so I have to say, thanks for the books, Charlie. Loved them all so far.

@75, tomatoes are not in the same family of plants as any that produce THC. Strangely you can make the cannabinoid skeleton by microbial fermentation of certain tannins, such as when a human eats pomegranate fruits. The product is not psychoactive in the same way but with the incredible variety of cannabinomimetic compounds being tested and now being made illegal someone will find a simple one to make. See @28.

@18, ibogaine has big problems when used to cure addictions;

you have to want to give up

you have to give up before you take it

it causes some type of brain damage not fully characterised and with unknown prognosis

small amounts (not the brain-busting mega-doses used in addiction therapy) are lovely (where legal).

British studies before WWII showed that Scottish opium is equal in quality and quantity as any grown in the Far East, though you only get one crop per year. The only reasons people don't grow it indoors seems to be the lack of previous experimentation and the lack of entrepreneurial spirit of the interested parties. Cocaine would be easily grown indoors except for the difficulty of obtaining seed. It dies within 2 weeks and you have to have some cojones to go seed-collecting in the first place.